Investing in Fracking Stocks

You might hear people say that investing in fracking is risky business. What with the record low prices for natural gas and the environmental concerns that surround fracking, some say it could be an unstable industry.

But fracking stocks can also be highly profitable, if you know where to look. 

Shale oil and natural gas have been called the ways to America's energy independence and have already begun to lessen our dependence on foreign petroleum sources.

After all, the EIA projected that the U.S. has 482 trillion cubic feet (Tcf) of technically recoverable resources in shale gas alone.

And taking shale and other sources into account, President Obama said in his January 2012 State of the Union address that the U.S. has the resources for nearly 100 years of domestic natural gas.

All this is made possible by fracking.

It's booming in states like North Dakota and Kansas, creating jobs and state revenue. In boomtowns with generous jobs available, housing and infrastructure is necessary for workers. Pipelines are needed to transport fuels. Storage facilities must be built for containing the abundant resources.

So there are plenty of ways you can play the industry, but where do you start?

One For the Money 

Of course, you can get involved in fracking by investing in individual companies.

For this, you'll want to look into companies that hold stakes in some of the major shale plays or are otherwise involved in fracking activities. Here are a couple fracking stocks worth looking into:

Continental Resources (NYSE: CLR), for example, is involved in drilling activities in a number of U.S. shale plays, including the Bakken and Niobrara.

Rosetta Resources (NASDAQ: ROSE) also has shale assets in Eagle Ford and the Southern Alberta Basin.

Encana (NYSE: ECA) is a solid, conservative natural gas producer who will benefit considerably from large increases in natural gas pricing.

All Your Eggs in One Basket

Another approach is to invest in a exchange-traded fund. An ETF is an investment fund that looks like a mutual fund, tracking commodities, an index, or a group of assets, but that trades like a stock on an exchange (as the name implies).

ETFs have more tax efficiency and liquidity than mutual funds, though they do hold risks, as any individual stock would. 

Asset-holding ETFs are often specific to a single industry. And there's one new ETF that focuses on fracking stocks. 

In February 2012, Market Vectors put together an ETF for companies involved in fracking.

The Market Vectors Unconventional Oil and Gas ETF has the easy-to-remember ticker symbol FRAK and trades on the NYSE Arca exchange.

FRAK currently has holdings in 48 companies in the United States, Canada, and Australia. Companies involved must receive 50% of their revenue from unconventional energy or own properties that could give them that capability in the future.

Here are its top 5 holdings, with the percentage of net assets:

• Occidental Petroleum Corporation (OXY) – 8.47%

• Anadarko Petroleum  Corporation (APC) – 8.14%

• EOG Resources (EOG) – 7.12%

• Devon Energy Corporation (DVN) – 5.53%

• Noble Energy Inc (NBL) – 4.98%

The ETF does have a tendency to shadow natural gas price trends, as you can see in the chart below: 

And since natural gas prices have been falling in the wake of fracking success, the price is low right now. But industry officials are making efforts to raise those prices again to be profitable.

Partner Up

Another way to profit from fracking is through a master limited partnership, or MLP.

MLPs can be more reliable because investors can depend on a dividend. The partnership includes the general partner, or the company and its employees, and the limited partner, or all the shareholders. The general partner in this kind of investment pays out the profits to investors as dividends, which are in turn only taxed at the 15% dividend rate. 

Because MLPs must be almost entirely involved in real estate, commodities, or natural resources, it's a great place to look for fracking opportunities.

Kinder Morgan Energy Partners (KMP) is the MLP of general partner Kinder Morgan (NYSE: KMI). It is involved mainly in pipeline transportation and energy storage for petroleum products. 

In the company's 2012 projection, it placed an emphasis on company growth and shareholder return, making it a goal to distribute $1.7 billion back to its limited partners.

In 2011, the company distribution was 3% over 2010, and it projects that distribution for 2012 will be 8% over 2011. 

Its dividend on April 26, 2012 was $1.2, or 1.45%.

Another fracking MLP to consider is Enterprise Products Partners (EPD). The general partner owns assets in pipelines, storage, natural gas processing plants, marine services, fractionators for natural gas liquids (NGLs) and propylene, offshore platforms, and NGL import and export terminals.

The company prides itself on having raised its distribution rate in 31 consecutive quarters (in April 2012) out of the 40 since IPO.

Enterprise Products' April 26, 2012 dividend was $0.63, or 1.22%.

And there are plenty of other companies that will give you the potential for profit. Remember, make sure to weigh your options and do your own due diligence before investing. Get a feel for the industry and its movements, and when the time feels right, make your move.

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